Energy Junk Bonds Near Record as Oil Price Turbocharges Rally

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This content was published on January 11, 2018 6:14 PMJan 11, 2018 - 18:14

(Bloomberg) -- It’s as if the 2014 oil-price crash never happened for junk-rated energy companies.

The Bloomberg Barclays High Yield Energy Total Return Index is approaching a record high as a global rally in speculative-grade debt gets turbocharged by surging oil prices, and a weak U.S. dollar continues to boost commodities across the board. The best-performing bonds of the past 12 months include some of the biggest victims of the 2014 crash and have delivered total returns as high as 47 percent.

W&T Offshore Inc., which focuses on the U.S. Gulf of Mexico, was the best performer during the past year, returning 47 percent. Transocean Ltd., the world’s biggest offshore rig owner, delivered a 33 percent gain. Lonestar Resources America Inc. posted a 25 percent return. Spokespeople for the companies didn’t immediately respond to requests for comment.

“The best performers were the ones that were probably near death,” said Scott Roberts, head of high-yield investments at Invesco Ltd. in Atlanta. “The bigger companies weren’t really at risk.”

To see why the spread on energy junk bonds shrank to a record, click here

When the oil market tumbled in mid 2014, it took a host of energy companies down with it. Those who survived cut back on capital expenditures globally, Roberts said. With crude prices now rising, oilfield service companies have started to talk about raising fees, which will spur explorers to raise their capital budgets this year, Roberts said.

Improving corporate earnings and global economic growth have made high-yield bonds’ risk-return profile more attractive over the past year. Energy companies have had the added benefit of an oil price that’s up 52 percent since late June, boosted by OPEC production cuts, shrinking U.S. stockpiles and a weaker dollar.

“As long as the dollar stays weak and oil stays up, there’s money to be made,” Roberts said.

--With assistance from Vivian Li

To contact the reporters on this story: Kevin Crowley in Houston at kcrowley1@bloomberg.net, Molly Smith in New York at msmith604@bloomberg.net, Brandon Kochkodin in New York at bkochkodin@bloomberg.net.

To contact the editors responsible for this story: Reg Gale at rgale5@bloomberg.net, Joe Carroll, Dan Wilchins